Chesto: Taxing time for medical device industry

When Scott Brown arrived in Washington early this year, one of the first things the freshman senator tried to do was to block a new tax on medical device companies.

Jon Chesto/GateHouse News Service

When Scott Brown arrived in Washington early this year, one of the first things the freshman senator tried to do was to block a new tax on medical device companies.

As a newcomer in the minority party, it wasn't surprising that the GOP hero didn't succeed.

But Brown hasn't given up. In a speech to the Massachusetts Medical Device Industry Council last month, Brown vowed to tackle the tax next year. Last week, Brown reiterated that goal as he spoke to Associated Industries of Massachusetts about his plans for 2011.

The 2.3-percent tax on medical device sales might have been a foregone conclusion, if it wasn't for all those Republican victories in the Nov. 2 elections.

Now, there's a regime change under way on Capitol Hill, one that is leaving leaders in the medical device industry hopeful: If the tax, which is set to take effect in 2013, can't be repealed entirely, maybe it can at least be modified so it doesn't have such a damaging effect on the industry.

There's a good reason why Brown quickly adopted this as a pet project. The stakes are high here in Massachusetts, an undisputed hub for medical device innovation and manufacturing. The industry employs roughly 20,000 people in the state. We're ranked either second or third in the country, depending on how you measure the size of the industry here.

If you want to figure out what the tax will mean in Massachusetts, the Chelmsford headquarters of Zoll Medical Corp. is a good place to start. The defibrillator company is enjoying a growth spurt. It still handles all its manufacturing work in the U.S. And CEO Rick Packer happens to be one of the most vocal opponents to the tax of any device company executive around.

A 2.3-percent tax might not seem like much, at first glance. But Zoll's annual revenue figures, which became public Thursday, show how much financial pain a mid-sized company might feel. Zoll reported $444 million in sales in its 2010 fiscal year. The medical device tax, had it been in place, would have eaten up $10 million of that amount. That would have represented more than half of Zoll's nearly $19 million in profits for the year.

Packer says if the tax survives, medical device companies would eventually pass on the full cost of the tax to the buyers of their products. But Packer says it could take five years or more to get to that point because of the stiff competition within the industry and prices that are spelled out in existing long-term contracts.

In the meantime, Packer says he would have to look for ways to absorb the tax by reducing the publicly-traded company's overhead. That means potentially cutting back on research and development work, Packer says, and possibly shipping some of the manufacturing work overseas to a country with less expensive labor costs.

Yes, other industries, such as hospitals and drug companies, are taking a financial hit to shoulder some of the burden of health care reform. But Packer points out that they'll directly benefit from the dramatic increase in the number of people covered by health insurance.

Any financial benefits from health reform, Packer argues, will be much more modest for his industry. He uses his company's defibrillators to make this point. A hospital will pay Zoll the same amount for those defibrillators, he says, regardless of whether the devices are used on patients with insurance or without coverage.

Packer says he's encouraged by the pending GOP shift in the House. Maybe the medical device tax can be reduced, or maybe it can be phased in over several years to lessen its impact.

But eliminating the tax completely might be a tough sell. After all, Democrats still control the Senate and the White House, and there aren't enough GOP votes in the House of Representatives to override a presidential veto.

Tom Sommer, the president of the state's medical device trade group, says the election results make it more probable that the tax could be repealed. But Sommer still considers it to be a long shot, given the current political landscape in Washington.

Sommer says he's hopeful that the ardent opponents to health care reform in the House might have enough traction now to force some compromise negotiations to take place. If those talks happen, Sommer says it's entirely likely that the medical device tax will end up back on the table.

As it stands now, the medical device tax is expected to generate roughly $20 billion in revenue over a 10-year period. But it could have been much worse for the device industry. A previous plan discussed for the health care bill would have cost the industry roughly twice that amount.

The Advanced Medical Technology Association, a national trade group for the device industry, isn't expected to give up on this issue. Brett Loper, the chief lobbyist for AdvaMed, says his trade group hasn't yet agreed on a formal strategy for the next session of Congress. But he fully expects to look for ways next year to mitigate the tax's impact.

Loper says he's unsure whether his group can successfully get the tax modified or repealed, even with the change in power on the House side. What is clear to him, however, is that the debate over the medical device tax will continue because of the recent election results. If the same people remained in power in the House, Loper says, it would have been highly unlikely that they would even consider revisiting the tax.

The flawed premise behind the tax, Loper says, is the belief that a significant rise in insured patients will result in a sea of profits for the industry. Unfortunately, the new tax could leave many medical device firms in a sea of red ink instead.

It's hard to find a fault with the simple argument that health care coverage is a fundamental right that should be extended to all U.S. citizens. But the medical device industry is learning the hard way that figuring out how to pay for that coverage represents a problem that is anything but simple to solve.

Jon Chesto is the business editor of The Patriot Ledger. He may be reached at jchesto@ledger.com or massmarketblog.com.

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